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How to Read Millions of Minds Using Charts

The trader’s main working tool is the chart or graph. A chart’s function is to present stock price history and indicate its future direction via conclusions based on the past: a kind of financial crystal ball where there is no present, and only the past exists. A nanosecond beforehand is already the past, a second forward is the future. When deciding whether to buy or sell a stock, we cannot be satisfied with only the current price. We must review where that price came from and conclude which direction it is heading.

We need to investigate when sellers stopped its rise in the past (resistance lines) and when buyers saved it from crashing (lines of support). Using this and other information, we need to determine how it will behave in the future and at what prices certain actions may occur. We will use as many charts as our computer screens allow to follow the various stocks, sectors and important market indices. Currently, I use nine screens and am considering adding another, but that is mostly to watch the amazed looks on faces of people walking into my work room.

Charts can be weekly, presenting information over several weeks; daily, presenting several days; or intraday, presenting data for the same day at different intervals such as on a one-minute or fifteen-minute basis. These charts provide the trader a look deep inside the market and trace the price changes, which are the outcomes of the constant tug-of-war between buyers and sellers. Stock prices do not rise or drop coincidentally. As a trader, I derive a great deal of pleasure from observing charts showing real-time shifts, imagining all the people seated behind their desks all around the world, buying, selling, and impacting on the price at the very moment I am watching.

Following Charts Gives an Edge in a Cut-Throat Competition

This is a “war” of control over money and power, with victory going to the person that makes the best decisions based on the information at his or her disposal. I enjoy following the traps that buyers and sellers set for each other. I see the errors and the successes and try to think what I would do in their stead. Even a person with vast experience in the capital market, but none in intraday trading, will find it difficult to understand the logic behind intraday stock trading.

Those with insufficient experience might be satisfied with just attempting to understand and analyze the weekly or daily chart. But in fact, intraday trading does have its logic, and plenty of it. The more screen-time experience you gain, the better you will understand what drives the bears and bulls influencing the stock, the more you will become acquainted with the intraday logic, and the greater your self-confidence will increase - to the point where you too will join the war. Every move the day trader makes, whether buying or selling, is based on chart patterns that we will learn, and on outcomes that represent the trader’s evaluation of the war’s outcomes as plotted on the chart.

Using charts now seems to me the most natural and obvious thing. How can we possibly manage without them? But that is not how things were in the past. Up until one hundred years ago, almost no charts were used. Quotes of stock prices reached the trading room by telegraph, a designated clerk wrote them down on a large board, and the previous price was erased. Successful traders were those blessed with excellent memories. Over time, it became understood that a connection exists between the past and future behavior of a stock price. Some traders began charting the information, seeking recurring outcomes. The use of charts began to make greater headway as famous chart-based theories began developing, such as the Dow Theory and the Elliot Waves. In the 1960s, charts became increasingly prevalent with the advent of the first industrialized computers.

Several accepted norms exist for presenting prices on charts. Different traders choose different methods, but most of them, especially day traders, almost exclusively use the “Japanese Candlesticks” method which will later be elaborated. Several of the methods are described briefly below, by way of initial introduction.

To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."

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